Sweethearting: A Bottom Line Drain for Retailers

June 21, 2012

By Andrew Wren, Wren Solutions

It’s no secret in the loss prevention industry that sweethearting, the practice of giving customers unauthorized discounts or free merchandise or services, is a major source of loss in retail. In fact, it has long been recognized as the most common type of employee theft and the largest contributor to loss in the industry. It is also a unique challenge to loss prevention efforts. Unlike other forms of employee theft, both the customer and the employee are aware of sweethearting.

There is very little historical data regarding sweethearting, which is surprising given that the problem is so pervasive and represents such significant loss. However, the most recent National Retail Security Survey, published in October 2011, provided statistics for the first time pertaining to theft via collusion between employees and customers. According to the survey, 96% of the 140 retail companies surveyed reported some incident of internal theft through collusion with someone who was not an employee of the company.

New study: Staggering retail losses
Now, a new study appearing in the March 2012 issue of the Journal of Marketing (Brady, Voorhees, & Brusco) has shed light on the issue, the factors and employee traits contributing to sweethearting behaviors, and the staggering losses caused by sweetheart deals each year. The study, which is the first of its kind to look exclusively at the role of sweethearting in employee theft, revealed the jaw-dropping truth behind this not-so-sweet drain on retailers’ bottom lines.

Results of the study, which surveyed nearly 800 customers and employees of the retail service industry, included:

Sweethearting costs the industry nearly $80 billion dollars annually;

Sixty-seven percent of respondents said they had participated in sweethearting in the past two months;

Many employees reported their motivation for sweethearting was the prospect of receiving better tips and similar deals at the customer’s place of business (“tit-for-tat”); and

Sweethearting was pervasive across all service industries, including restaurants, hotels, car washes, tanning salons and other retailers.

While the employees who hand out sweetheart deals most likely do not understand the severity of the problem, they are representative of only one side of this story. While the employee is in it for an anticipated return in the form of higher tips or other “rewards,” the customer not only receives discounted or free goods or services but also walks away with feelings of goodwill toward the employee. From the perspective of a marketer, it is important to remember that close customer-employee relationships are vital to building customer satisfaction and loyalty, which can be affected by sweethearting. However, customer responses from the study indicated that sweethearting could inflate a firm's satisfaction, loyalty, and positive word-of-mouth scores by as much as 9% when in reality, the satisfaction and loyalty are directed to the employee, not the company. Worst-case scenarios, according to the study, have management rewarding the very employees responsible for losses due to sweethearting.

Sweethearting can be difficult to detect
Common countermeasures include the use of surveillance cameras and employees or security guards checking customer receipts at exits. However, these measures, while beneficial, are no longer sufficient. Even as the study identified fear of being caught and subsequent punishment as possible deterrents of sweethearting behavior, the findings highlight the need for enhancements to current prevention strategies to effectively curtail sweethearting behavior.

According to the authors of the study, education and training are needed to inform employees of the ramifications of sweethearting. The most effective programs, they said, lay out clear standard operating procedures, encourage employees to be aware of the problem and report anything suspicious to management, and amend training to include discussions of personal integrity as well as the consequences of sweethearting and theft in general. They also suggest thorough pre-employment screening that measures potential employees’ personal ethics, comfort with risk-taking, and need for social acceptance in order to weed out potential sweethearters before they enter the organization.

Whatever methods are employed, there must be visibility into store-level activities in order to effectively monitor and mitigate factors involved in collusive theft. In fact, the Loss Prevention Research Council (LPRC) has pointed to auditing as a leading predictor of shrink in retail. “Thorough and regular audits are a powerful predictor of individual store performance,” said Dr. Read Hayes, director of the LPRC. Companies that audit have a better handle on what is occurring on a store level.

To provide visibility into factors leading to sweethearting losses, a strong audit solution should include:

Design that facilitates dynamic creation, configuration and modification of audits;

Follow-up that allows users to view an action plan and follow up on action items;

Mobility that enables auditors to conduct audits in the field using mobile devices;

Enhanced reporting features that make trends easy to spot, such as graphical representation of performance and trends across business units;

Standards that allow the auditor to measure and evaluate based on the company’s standard practices; and

Scalability that enables configuration to accommodate as many roles, users, and audits as needed.

Once a retailer has a solid auditing program in place, they can begin to use the accumulated data in a way that affects their bottom line. By evaluating factors such as performance by location and trends by business unit, LP professionals can pinpoint problem areas where things like sweethearting are occurring and begin to build new processes and procedures around them. A strong audit program will also ensure that a level of awareness exists among all employees, not just the loss prevention team. As a result, store employees will feel more accountable for the level of shrink in their store and be less likely to brazenly steal or give away merchandise.

In the fight to reduce and ultimately eliminate loss due to employee theft, enhancements to existing security measures and audit procedures will help identify areas for action and remediation. Armed with the right information, retailers have the ability to highlight issues and address organizational challenges such as sweethearting.

Andrew Wren serves as CEO of Wren Solutions, a loss-prevention technology provider helping LP professionals reduce loss, increase profits and rise as heroes in their companies. Wren is responsible for corporate and product strategy, leveraging his more than two decades of security technology expertise.

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